Markets Today: So So

Two words, both beginning with ‘so’ – solid and some – marked the FOMC statement out as very subtly more hawkish than its recent predecessors. It leaves the US dollar slightly higher; US bond yields little changed after an initial dip down; and equities modestly higher (S&P500 +0.73%).

Those going into the FOMC statement with a view that September was the most likely date for lift-off (the majority of Wall Street economists) will not have been dissuaded from their views out of the Fed. Those believing a move is not coming until December/Q4 – the majority of US money market participants – will overall not have been persuaded to change their view either.

So, we are left with even more than the usual elevated importance being attached to upcoming US employment reports, of which there are two this side of the September 16/17 FOMC, in gauging the likely date for ‘lift-off’ and whether we might yet still get two tightenings this year (the official NAB view).

The FOMC statement was in most respects a carbon copy of its June predecessor. The last four paragraphs of a five paragraph statement contained only one word change. This was the addition of the word ‘some’ in from of ‘further’ in the sentence that now reads “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”.

The inclusion of ‘some’ is being interpreted as meaning that only slightly improvements are required from this point before the Fed regards the labour market conditions for lifting rates to have been met. We’d agree.

In the first paragraph, it was the inclusion of ‘solid’ that was most telling, as in “The labor market continued to improve, with solid job gains and declining unemployment. Previously the Fed had noted only that ‘the pace of job gains picked up’ and that the ‘unemployment rate remained steady’.

What marked the statement out as only subtly more hawkish was the absence of any encouragement for the view that the FOMC sees inflation pressures as picking up – the other half of the Fed’s dual mandate of achieving maximum employment with price stability. The Statement deleted reference to energy prices having stabilised – a necessary sop to the recent renewed downturn in oil prices. It again notes that “Inflation continued to run below the Committee’s longer-run objective” and that “market-based measures of inflation compensation remain low”.

So while upcoming labor market indicators in line with recent trends can led the Fed to conclude that labour market slack is no longer a constraint to tightening, they will still want to be more confidence than they are currently that inflation is, or is likely to, pick up before acting.

The only other piece of market relevant macro-economic news overnight was US pending home sales and which unexpectedly dropped (-1.8% against an +0.9% expected)

In FX, the US dollar is firmer out for the FOMC against all G10 currencies bar the Norwegian Krone (and where oil prices are up on the night, despite a comment from US House speaker Boehner that he support a lifting of the ban on US oil exports). EUR/USD (-0.64% to back below just 1.10) has fallen more than AUD/USD (-0.56% to 0.7293) and NZD/USD (-0.27% to 0.669). Note a decent jump in iron ore prices o/n ($2.44 for the China 62% fines benchmark, to $55.89). Other industrial metals prices are also modestly higher.

Coming Up

Out of the FOMC, US Advance Q2 GDP is the main draw today, which we look to print closer to the 2.5% consensus, with consumption and housing the main sources of growth and less of a drag from external trade than in Q1. Potential revisions to Q1, and the PCE deflator numbers, will also attract attention.

Domestically, June building approvals are due at 11:30 AEST and where NAB is looking for a 1.5% rise (consensus -1%) supported, we expect, by continuing growth in the apartment development pipeline with detached home activity flatter.

Export and import prices for merchandise trade are also due, expected to show a 5.0% export price hit from weak commodity prices, while import prices look likely to rise modestly resulting in a 4.5% decline in the terms of trade (vs. market consensus for about -5.5%).

Before the data RBA Governor Glenn Stevens is due to speak at an Asia Financial Cooperation Conference (10:30AEST) but after last week’s hard core macroeconomic address to the Anika Foundation lunch, this is unlikely to dwell on issue relevant to monetary policy.

Elsewhere Offshore, Japan industrial production will rate a passing mention in our time zone. In Europe, we get German unemployment and CPI, and the EC July Eurozone business climate and various confidence indicators.

Overnight

On global stock markets, the S&P 500 was +0.70%. Bond markets saw US 10-years +2.88bp to 2.28%. On commodity markets, Brent crude oil +0.64% to $53.64, gold 0.0% to $1,096, iron ore +4.6% to $55.89. AUD is at 0.7294 and the range was 0.7282 to 0.7351.

About the Author

Ray Attrill is Head of FX Strategy within the Fixed income, Currencies and Commodities division of National Australia Bank.

In this role, he advises the bank’s dealing rooms and institutional and corporate clients on developments in global foreign exchange markets.

Ray has 30 years experience as an economist and market strategist, obtained in roles working in London, Sydney and New York. Prior to joining NAB in 2012, he held a similar role at BNP Paribas, based in New York.

He previously amassed considerable experience in research and strategy, being a joint founding partner for 4CAST limited, a leading independent economic and financial market research company. Prior to that, he worked for many years in senior roles at MMS International, also a leading on-line market research provider.

He holds both Master and Bachelor of Science degrees in economics from the London School of Economics.